UK companies stuck in EU:ETS limbo

UK companies participating in the European emissions trading scheme (EU:ETS) remain in limbo regarding their future involvement, four months after the referendum vote to leave the EU.

The current government timetable is to have concluded by April 2019 the formal process to sever tie with all European institutions. However that date is not compatible with the official phasing of the EU:ETS. The current, third, phase is not due to expire on 31 December 2020.

Any mid-phase change, enforced before the official end of phase three, would be extremely complicated to deliver. Equally, if Brexit negotiations are lengthier than anticipated, UK companies may be left in limbo regarding whether they will need to participate in the ETS’ fourth phase, starting in 2021.

The biggest challenge facing participants will involve the exact allocation and management of existing allowances. Any break from the EU:ETS leaves participants facing complex issues managing their allowances either side of the deadline.

Any mid-phase exit would inevitably have several potentially disadvantageous consequences for current participants. Any surplus allowances backloaded for auction later in the current phase would simply not be released to UK companies. With allocations from the New Entrants Reserve only available at the close of the period, this facility will be unusable by qualifying companies. Indeed, a mid-phase exit will even exclude access to the up to 700m excess unallocated allowances, set to be transferred into a new stability reserve from January 2020.

While theoretically UK companies can remain involved in negotiations regarding the fourth phase, beginning 2021, it seems improbable that such participation would be worthwhile. Already, the in-limbo status regarding EU membership means that views expressed from the UK are treated as irrelevant across every portfolio by those based in the other 27 countries. This is known to be severely disadvantaging many British companies.

The EU:ETS was created largely to assist with compliance with the Kyoto Protocol of 1997 on climate change. Signatories are required to report on emissions compliance regularly, the next due date being December 2020. Previously UK emissions had been submitted only as part of the overall EU report. Now the UK will have to untangle its statistics, and meet all its Kyoto Protocol obligations separately.

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